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GENTRIFYING THE WILD WEST A Can suptech take DeFi to the next level?

s technology-driven decentralised finance (or DeFi) grows in popularity and market value, it appears that a battle is brewing between DeFi protocols and regulators. But can technological tools in the hands of regulators head this off at the pass? A reasoned, transitional approach to compliance, along with powerful supervisory technology (or suptech) may hold the key to peaceful coexistence in this burgeoning new industry. Suptech is the application of new technologies to help regulators improve their oversight, supervisory and enforcement activities. DeFi is the application of new technologies to eliminate the need for rent-seeking intermediaries by applying automated business logic to allow market participants to interact with each other seamlessly. Current financial regulatory regimes rely on the licensing and monitoring of financial services providers who function as intermediaries in the financial markets. Many DeFi protocols, as a practical matter, function as unregulated, borderless robo-intermediaries that impose few or no compliance requirements – including, notably, know your customer (KYC) – on participants. This seemingly intractable conundrum lies at the heart of the challenge of harnessing the power and attractiveness of DeFi innovations to responsible consumer protections and market risk mitigation. Last month, the Financial Stability Board (FSB) published a report on the use of advanced technologies by authorities and regulated institutions to improve oversight and compliance functions. Suptech is increasingly being utilised by regulatory authorities keen on enhancing their ability to monitor and gain insights into a variety of financial market risks and activities.



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Patrick Campos, Chief Strategy Officer, and Jackson Mueller, Director, Policy & Government Relations, at Securrency

Regulators have long used technology to improve oversight functions and capacities before the term suptech first emerged in 2017, when Ravi Menon, managing director of the Monetary Authority of Singapore, asked why regulated entities should have a monopoly on the use of technology for compliance purposes, when regulators, themselves, can also harness technology to enhance the efficiency and effectiveness of supervision and surveillance. Since then, a number of regulatory bodies around the world have established strategic frameworks around suptech specifically, or included suptech as part of broader strategic initiatives. Those efforts include launching specialised units within regulatory authorities or conducting limited tests and pilot initiatives to understand how the application of advanced technologies can support and enhance certain regulatory functions. As the FSB report and prior suptech reports have indicated, regulators are still early on in their assessment of suptech tools and services and the current focus largely revolves around how new technologies can help regulators sift through and generate deeper meaning from the mountain of information reported to the regulator from its regulated entities. Indeed, the most common suptech use cases reported by authorities, as discussed further in the FSB report, include regulatory reporting and data management. When one considers the volume of

materials that must be provided by regulated entities to their respective regulators, it is no wonder that regulators are interested in suptech to more effectively and efficiently monitor the increasing amounts and types of data being reported to them. In 2020 alone, JWG Group – a market intelligence platform providing regulators and industry with independent analysis of regulatory changes taking place around the globe – has already filtered through 700,000 alerts from more than 700 bodies that issue financial services rules across the globe to net 24,000 relevant documents with a total of 380,000 pages. While, as noted, regulatory authorities have largely focused on applying suptech to derive greater efficiencies in regulatory reporting and data dissemination and analysis, financial technology continues to evolve and market participants increasingly seek to unlock greater efficiencies by becoming less reliant on intermediaries through self-executing ‘smart contracts’. In this environment, current strategies around suptech must move beyond a forensic, reports-driven approach to more

proactively identifying and warding off risks by more broadly incorporating artificial intelligence (AI) and other technologies that enhance accountability and auditability of market activities. In the meantime, ongoing developments in the DeFi space and the proliferation of digitalised assets in tokenised form, continues to attract retail, institutional and regulatory attention (both positive and negative). As traditional modes of finance increasingly move to a decentralised environment, where the role of the financial intermediary is reduced or removed entirely from the lifecycle of a financial transaction, these innovations will continue to face the headwinds of current regulatory structures. As noted by US Securities and Exchange commissioner Hester Peirce, a regulator

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In this final edition of the year for The Fintech Times, Brett King takes a look at the impact that Covid-19 has had on all of us, as well a...

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